Financial Management Fall 2010 Lecture 10: Investment Criteria (II) Professor Erica Li Ross School of Business
Roadmap Internal rate of return (IRR) Difference between NPV and IRR Understand the circumstances under which the IRR rule disagrees with the NPV rule Understand how to calculate the cross-over rate Textbook reading: Chapter 9 (ignore MIRR)
Internal Rate of Return (IRR) IRR is the discount rate that makes NPV=0 9-3 0 = C0+Ct(1+IRR)tt=1T∑
Example What is the IRR of this project?
Financial calculator [2ND][CF] start the cash flow chart [+/-][ENTER] CF0, the initial investment, negative sign [ENTER]  C01 [ENTER]F01 the frequency: the number of times it occurs (or just simply do ) [ENTER]  C02 and F02 [ENTER]  C03 and F03 [NPV][ENTER]  [CPT] NPV with required return 12%  skip NFV [CPT] Payback period [CPT] Discounted payback period [IRR][CPT]IRR =16.13%